After KWN reported on Christmas Eve that the public appeared to finally be gambling "all in" on soaring stock markets, KWN then reported on New Year's Eve that the world just witnessed a major warning signal that preceded the stock market crashes in 1987 & 2007. Well, remarkably the public now has one of the highest exposures to stocks in the last 30 years! The fantastic piece below covers this major warning signal and also includes two critical illustrations.
January 7 (King World News) – "Individual investors became significantly more positive in December, skewing their portfolio allocations toward stocks and away from cash to the greatest extent since the year 2000 (see chart below).
Individual investors have clearly returned to the siren song of stocks, if one goes by the story told by fund flows and various sentiment surveys.
Fund flow data is more reliable, due to it reflecting real money instead of opinions, and in that case a page 1 story in the Wall Street Journal about a record rush into passive index funds should raise an eyebrow.
The latest survey data from the American Association of Individual Investors is similarly worrisome. As of the end of December, investors were holding 53.7% more of their portfolio in stocks than in cash, one of the highest amounts in 30 years.
The long-term average spread between stock and cash allocations is 36%, so investors are currently 17.7% more exposed to the stock market than average. The only other times it reached this level of extreme were in the latter half of the 1990's. It first occurred in September 1996, then again during most of the months from July 1997 through August 2000.
The biggest trouble was preceded by exceptionally low cash levels, something we touched on indirectly on Friday. In April 1998 and December 1999, investors were holding 12% of less of their portfolios in cash, and stocks struggled soon afterward. Currently that figure is at 14.8% – still historically low, but not quite to the extreme seen before the other troubles began.
Of course, that is only comparing our current situation to the 1990's bubble. Perhaps this is like 1998 (currency volatility) or even 1999 (isolated tech bubbles), or perhaps it's simply like most of the past decade except even more extreme.
Throughout the 2003 – 2008 bull market, when the differential exceeded +15%, stocks struggled for several months while investors retrenched. That hasn't been the case over the past year, suggesting this might be more like the 1990's than the mid-2000's.
Either way, it's not a positive sign. Whether it's an actual negative or not is debatable, and it isn't strong enough to add to the Active Research. This is just a small portion one of the latest fantastic reports. To try a free 14-day trial of the internationally acclaimed work that Jason Goepfert produces at SentimenTrader simply CLICK HERE.
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